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Supplier Relationship Management – a long way to go

Posted by Tim Cummins, President of IACCM, Professor, Leeds University School of Law; Chair, International Commercial & Contract Management | Aug 6, 2017 2:16:00 PM

In the world of sales, the value of relationships is well understood. A key business goal is to generate repeat customers, to establish a sense of trust and loyalty. This is because, in general, the cost of servicing a repeat customer is lower than the cost of finding and closing new business. Sometimes, it is also true that loyal customers are willing to pay higher prices – or, in the case of less scrupulous suppliers, can be taken advantage of because they are less likely to price shop.

The economics of relationship management is relatively well understood from a sales and marketing perspective and this is reflected in sophisticated segmentation models that generate different levels of relationship support and depth. The range of technologies that are now available has enabled ever-increasing sophistication and variety in the nature and scope of those relationships, taking account of detailed customer preferences, demographics and values to produce targeted and differentiated offerings and terms and conditions.

That same sophistication has been much slower in coming to supplier relationships. Indeed, the more that suppliers have sought to implement strong relationship selling, the more that buyers have felt the need to resist. Global networked technologies opened a world of apparently endless, low cost competition, providing opportunities to achieve price-based savings and encouraging the abandonment of ‘relationships’, which were seen as innately exploitative. Strategic sourcing encouraged a mentality of arm’s-length transactions, controlled interactions and commoditization.

Scrapping relationships came at a cost. Dealing with a constant churn of suppliers has many hidden risks. Loyalty and reliability disappear. Ethical standards become unaffordable. Opportunism becomes the order of the day. One direct consequence of buyer behavior has been a steady growth of national and international regulation, which is now a major cost imposition on business. In other words, the savings achieved through aggressive procurement methods have in large part been eliminated by the additional costs that flow from those methods.

It is this environment which is driving a steady re-think of procurement practices and supply relationships, but often still without the strategic clarity of customer relationship management. Disciplines such as SRM remain confused and struggle in many cases to obtain investment and support. That confusion is evident in the typical program that focuses on a few ‘strategic suppliers’, without having any clarity on the broader approach to supplier relationships in general. As a result, processes and responsibilities often remain confused and benefits are elusive.

Even the most basic analysis quickly demonstrates that today’s practices for establishing and managing customer-supplier interactions make little economic sense. Approaches that are based on lack of trust and openness are by their nature inefficient and frequently self-defeating. While ‘cosy’ and opportunistic relationships are clearly not the answer, what we really need is a shared approach to relational strategies and evaluation – an approach which explores optimised mutual benefit rather than sub-optimal individual gain.

Topics: contracting excellence, supply chain management, contract management

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